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October 2007

Diamonds are Not a True Commodity

There has been a lot of press about Martin Rapaport’s plan to set up Internet diamond auctions, including a recent article in the International Herald Tribune. Rapaport has set up the auctions to generate an “index” that will eventually be used to set prices for an exchange that will trade diamond futures.

Charles Wyndham, another Internet commentator, also wants a diamond futures market. Some of the leading industry banks also seem interested in the concept, because they see it as a way to get more investment in the industry.

Yet so far the results don’t seem too encouraging. T Rapaport’s first auction of 210 lots was disappointing.” only 27 stones were sold .

This is similar to what happened with the Diamond Circle Capital Fund. The investors behind this planned a $140 million IPO for a fund made up of larger, better stones. Yet they withdraw the fund for lack of interest. It is unclear when it will reappear on the market.

Of course, all this is early days, and the auctions could turn out to be more than they are. This was just the first experience. Mr. Rapaport is a very determined man, and he may be able to iron out some of the kinks in the auction.

We have no problem with selling diamonds via auction, Christies and Sotheby’s have been doing for years. Our objection is to the entire concept, particularly Rapaport’s and Wyndham’s plan to sell diamond futures.

We are not sure how any diamond futures plan will help the industry or the investor. These plans are misguided because they don’t understand what the diamond market is about and why companies like ours have devoted our lives to diamonds.

On our desk for many years, we had a sign, given to us by the De Beers Diamond Promotion Service at a Carat Club meeting: “Diamonds. Each as unique as your love.”

That is a wonderful illustration of why people like diamonds. Diamonds are created by nature, and each one is different. Just like every person is a unique, and every relationship is unique.

It is this that makes them valuable. When you reduce them to numbers, you take that away. If we view them as just a commodity that can be traded like pork bellies, then we might as well sell synthetic diamonds created by a machine in Florida.

Moreover, this new mechanism is not necessarily fair for the investor. These speculators will be gambling on whether the price of diamonds will go up and down — but is it fair for them to be competing against diamond traders, who have devoted their lives to studying the stones? And why would a trader want to bet against the price of diamonds when he has so many in his stock? It’s like he is betting against himself. That is essentially what doomed the plan for diamond futures thirty years ago, when it was tried then.
In addition, the Rapaport mechanism attempts to set a price for stones. But what sets diamond prices? The Rapaport list. Diamonds are still not an ordinary market.

There are other risks as well. In a press release on diamond futures, the International Diamond Manufacturers Association wrote that they “expressed grave concerns regarding the risks to the industry resulting from the anticipated volatility which will be interjected into an otherwise reasonably stable marketplace.”

It is ironic that this new plan to determine a “value” for diamonds may rob them of the very thing that makes them valuable. 

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